Dean Baker is co-founder of the Center for Economic and Policy Research. He previously was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University. He has a Ph.D. in economics from the University of Michigan. His latest book, The End of Loser Liberalism, has recently been released to download free of charge on the CEPR website.

Interview conducted by Philip Pilkington, a journalist and writer based in Dublin, Ireland.

Philip Pilkington: The problems we currently face are without doubt, as you say, purely demand-based. Certainly all the evidence I’ve seen – from both sides of the pond – leads to this conclusion too. I know that in the book you say that this too is part of evading the real problems underlying the crisis. As you’ve said in the previous part of the interview, these are largely to do with seriously unbalanced income distribution and a lack of purchasing power among workers. You’ve said in the book that these problems have been generated by the ‘trickle-up’ or ‘supply-side’ economics theories that became popular in the 1970s and were implemented thereafter.

Do you think that your profession – and, for that matter, those commentators and policymakers that they have trained – are ignorant of the problems you highlight in the book because they are so beholden to supply-side theories or do you think that they use their supply-side theories as an ideological mask to make political arguments? If the former is the case, then how on earth has economics become such an irrelevant and dogmatic discipline? And if the latter is the case the how has the profession become so corrupted?

Dean Baker: Just to be clear, the prevailing dogma in the profession is not exactly supply-side as people ordinarily think about it. Rather, it is the idea that monetary policy can deal with any demand shortfalls. The idea here is that if consumers are not spending enough to keep the economy near its full employment level of output, then we can simply have the Fed lower interest rates until it sparks enough consumption and investment that it brings the economy back to full employment.

There was sort of a neat test of this with Clinton’s deficit reduction in the 90s, where the mainstream of the profession saw one thing and my take was quite different. Their view was that we got the deficit down – which reduces demand – but then interest rates fell and we made up the gap. While we did make up the gap, it was not done in a sustainable way. It was the result of a stock market bubble driven consumption boom. There was little appreciation of the fact that this was a bad way to go at the time and there is still little appreciation in the economics profession of the fact that the 90s expansion was not on a sustainable course.

In terms of why economists believe what they do, I think it is a combination of ideology and corruption, although the sort of crude corruption that got highlighted in Inside Job, with people just selling their expertise for dollars, is rare. The idea that monetary policy could deal with any demand shortfalls was pretty widely held across the profession until recently in part because it was not so obviously wrong. There is no doubt that lowering interest rate can boost the economy and monetary policy was reasonably effective in bringing the US economy quickly back to something near full employment in the 80s after the steep downturn in 1981-82. There was a similar story in Europe as well.

Now part of the picture depends on what is considered full employment. We had unemployment rates in the best years of the 80s that would have seemed horrible from the perspective of the late 60s. (The unemployment never fell below 5.0 percent for any month in the decade. By contrast, it was averaged just 3.5 percent for all of 1979.) However, economists justified the higher unemployment rate by saying that the structural rate of unemployment had risen, meaning that we had more people who would be unemployed because they lacked the skills for the jobs available or they didn’t live where the new jobs were being created. This structural unemployment story was considerably more important in Europe than the US, with many countries seeing their unemployment rate rise from around 2-3 percent in the 70s to near double-digit levels in the 80s and 90s. Anyhow, this allowed them to define away any demand-side problem.

In the US case, it was held as an absolute article of faith that the unemployment rate could not get below a range estimated to be between 5.6 percent to 6.4 percent without triggering inflation. It was remarkable that Greenspan kept interest rates low so that the unemployment could fall to first 5.0 percent in 1997 and then 4.0 percent in 2000. He never would have done this had he been a conventional economist. (Two Clinton appointees to the Fed argued with Greenspan at the time that he should raise rates to head off inflation.)

My take-away from this experience is that we had demand side unemployment in the early 90s that eventually went away as result of the demand generated by the stock bubble. The conventional economists’ view of this experience is that something changed in the U.S. economy in the mid-90s that allowed the unemployment rate to fall to lower levels.

If we ask why economists would believe something about the world that seems to fly in the face of evidence, my answer would be that it is the easiest path for them. The vast majority of economists have no interest in upsetting the apple cart. They wanted to be economists because it is a relatively well-paying and prestigious profession. The way you move ahead in the profession is you repeat what the people who are more prominent than you are saying. This carries no risk. If they are right you can share in the glory. If they end up being wrong, then you have the “who could have known?” excuse.

In terms of the leading lights of the profession, they have no reason to change what they are saying because no one is ever going to cause them to lose their job or even their standing because they are wrong. How many people even missed a promotion because they failed to recognize the largest economic crisis since the Great Depression? Since the status quo position in the profession fits in well with most powerful interest groups, and everyone has been in the habit of repeating the same lines, there is little real pressure for change.

This is a depressing description of the profession, but people should understand that economics as practiced in the world cannot be seen as a neutral science. The deck is definitely stacked. Again, it is not typically in the form of someone getting money to push a particular line, it is more attributable to the way the profession has developed over the last five decades.

PP: What I don’t understand is this idea that deficit reduction leads to lower interest rates. My understanding is that central banks in modern economies have full control over the interest rate – they set it through open market operations. You can see this today in the US and the UK, who are running large deficits and low interest rates. But you could also see it in Japan in 90s and 00s. To the best of knowledge, even before they undertook QE in Japan there were low interest rates mirroring high deficits. Another example is during the 1974-75 recession in the US. Budget deficits soared but interest rates remained relatively low.

I could go on and on, but my key point is that modern central banks seem to have full control over interest rates through open market operations.

Tell me, do you adhere to this “deficit leads to higher interest rates” view? What’s it all about? I can’t make any sense of it.

DB: The argument would be that deficits at full employment will lead to higher interest rates. It is always hard to measure this one since every time the economy goes into a downturn the deficit increases. A good statistical test would control for the business cycle, but our controls are not perfect. There is also an issue of expectations. If the deficit is low today, but expected to be very high in a couple of years, then we would expect this to lead to higher interest rates today.

Furthermore, if we want a fair test we have to pull out the impact of monetary policy. If the Fed raises interest rates because we have a large budget deficit, then the high interest rates are, at least immediately, the result of Fed policy, not the budget deficit.

I think there is some truth to this story, but it is hugely overstated. The basic story is that if we are at full employment, then running large deficits puts strains on resources. We are running out of workers, factories and other producers are operating at capacity, there are shortages of housing and commercial property. This will lead to upward pressure on prices (i.e. inflation) and upward pressure on interest rates. I think the story holds at full employment, but the economy has rarely been close to full employment in my view over the last three decades. Certainly we were in 2000, perhaps in 2007, but not on many other occasions. This means that larger deficits would not have had much impact on interest rates, assuming the Fed did not deliberately push them higher.

PP: Okay. Sorry to get a bit wonky here, but I think its worthwhile having this discussion.

I’d tend to agree with you that the underlying argument is usually one about inflation. When you really push a policy wonk on the issue they always end up saying that inflation is the key danger. But in your book you seem to indicate that aggregate demand – that is, overall spending power – in the Clinton and Bush years was largely driven by bubbles and massive private sector credit expansion (manifesting as negative savings rates).

If this is true, an increase in government spending in these years may have softened the need for bubbles and household credit expansion, right? What do you think? Were the debates in these years really upside-down?

DB: Absolutely, the obsession with budget deficits under both Clinton and Bush was entirely misplaced. Deficits could occur for bad reasons, as certainly was the case with Bush tax cuts that disproportionately benefited the wealthy, and wars that did not need to be fought, were not good reasons to run deficits. However, the deficits themselves were not a problem. If this money had gone to build up the infrastructure or to educate our children we would have been made much richer as a result of the deficits.

As it was, if we had balanced the budget in the Bush years, the impact would likely have been primarily weaker growth and more unemployment. There was no obvious alternative source of demand in these years. Of course if deficit reduction was accompanied by a serious effort to push down the dollar, and thereby boost net exports, then it could have created many jobs.

But the push to lower the dollar was independent of the budget deficit. There clearly was little political will to reduce the value of the dollar. That would not have changed if the budget deficit had been lower.

PP: Moving on, in the book you make the claim that had the financial system been allowed to melt down we would not actually have ended up in another Great Depression. This is not to say that you don’t recognise that letting the financial system melt down would have caused a lot of problems – for banks, of course, but also for pension funds and the like – but you say that those in charge of the bailouts exaggerated the importance of the financial sector. Could you explain briefly what you mean by this? And what do you think should have been done at the time of the bailouts?

DB: The point here is that we know how to reflate an economy. Massive government spending will do it. It got us out of the Great Depression, although not until World War II created the political consensus for the level of spending that was necessary to actually do the job.

A financial collapse cannot condemn us to a decade of stagnation and high unemployment. That only comes about from a prolonged period of political failure. If we had allowed the banks to collapse in the financial panic of 2008 then we would have had the opportunity to pick up the pieces and get the economy back on track with a massive stimulus program.

Of course it was best to not let the banks collapse. However the bailout should have come with real conditions that would have ensured the financial system was fundamentally restructured. This would have included breaking up the too big to fail banks (on a clear timetable, not necessarily at that time), serious caps on compensation, a commitment to principle write-downs and other real conditions.

At that time the banks were desperate. Without a big dose of public money they would almost certainly have been insolvent, so they would have had little choice but to accept whatever conditions were imposed. As it was, they almost got President Obama thanking them for taking taxpayer dollars in the bailout.

PP: Any ideas about what could be done with the banks now? Or is the damage already done?

DB: We still need to reform and downsize the financial sector. We don’t have the same leverage over the banks as we did at the peak of the crisis when we could have slapped whatever conditions we wanted on the loans and guarantees they needed to stay alive, but Congress can still pass laws that will rein in the industry.

At the top of the list is a financial speculation tax. A modest tax on financial transactions will do much to reduce the rents in the industry and to eliminate or drastically reduce short-term trading that serves no productive purpose. It will also raise a ton of money.

The second thing is breaking up the too big to fail banks. There is no justification for allowing banks to be able to borrow at below market interest rates because they enjoy an implicit government guarantee.

The third item on my list would be re-instating a Glass-Steagall type separation between commercial and investment banking. The Volcker rule, which limits proprietary trading by banks with insured deposits, was a step in the right direction. However it looks as though the industry is using the rule-making process to turn the law into Swiss cheese. It is likely that most banks will be able to find loopholes that will allow them to do as much proprietary banking as they want.

Anyhow, these would be my top three reforms. Politically, all of them would be very tough sells right now. By contrast, at the peak of the crisis, the industry would have voluntarily agreed to the last two in order to get the money they needed to stay alive.

PP: You write in the book that the idea that the banks repaid all the money from TARP is misleading. Could you explain this, because this myth is very prevalent in the mainstream media?

DB: Yes, this is really kind of a joke. The banks got loans at way below market interest rates from the government, and we are supposed be grateful that they repaid the loans? The difference between the market interest rate and the rate they actually paid amounted to a huge subsidy. This is something that anyone with even a passing familiarity with business or economics would recognize, which is why it is so insulting when political figures go around yapping about how the money was repaid with interest.

To see this point, suppose the government gives me a 30-year mortgage at 1 percent interest. If I make all my payments and pay off the mortgage has the government made money? By the logic of the politicians claiming that we profited by the bailout, the answer is yes.

A serious assessment would look at what the market rate for these loans was at the time they were made. To take one example, just before we lent $5 billion to Goldman through TARP, Warren Buffet lent $5 billion himself. He got twice the interest and a much more generous deal on warrants. Plus he knows that it was likely that the government would bail out Goldman if it got in trouble.

Elizabeth Warren commissioned a study of the implicit subsidies in the bailouts when she was head of the TARP oversight panel. As I recall, it came to over $100 billion on just the first batch of TARP loans to the large banks. This didn’t count the value of later TARP lending, the much larger lending programs from the Fed, nor the extensive set of guarantees provided by the Fed, Treasury, and the FDIC.

All of these commitments involved enormous subsidies. In the business world firms pay huge amounts of money if they want their debt to be guaranteed. And everyone understands that a below market loan is essentially a gift. That is why it is so insulting when they try to imply that the public has profited from these loans.

You can make the argument that it was good policy to subsidize the financial industry to get through the crisis, but to pretend that we did not subsidize them is just dishonest.

PP: Finally, and I think this is the biggest question of them all. It seems to me that today only those on the left have anything to say about the economy. The right – and the so-called centre – talk themselves in circles. Some come across as lunatics; others simply appear to be deeply confused about what is going on today. So, I guess the left is in a pretty good position in that all that they had been warning about for years – from the dangers of wealth inequality to the very real existence of major financial instability – has come to pass in an extremely apocalyptic way.

Yet, their prescriptions are shunned and they are still largely ignored. Minsky’s name is mumbled from time to time – rarely coherently, from what I can see – and Marx and Keynes are regularly invoked in the popular financial press, but it all seems to be nothing but parlour games. While what the left may have said a few years ago might have been ignored and even ridiculed, today it is treated like a sort of carnival sideshow: those supposedly in-the-know come along for a gawk but once they’ve picked up enough of the fancy ideas to come across as trendy at the dinner table they’re back to supporting contradictory and unsustainable policies and engaging in the very speculation and risk that they tut-tut.

What are progressive people to do in such circumstances? The whole thing has become quite bizarre. We’re still on the fringes and yet, at the very same moment, we’re taking up centre stage. How do you navigate in such a world? What do you think are the most effective interventions? In short: what are we supposed to do from here on in?

DB: Yes, what is to be done?

Well, the first thing is to be clear on where we are. We are up against an opposition that has almost complete control of the public debate. If you just stand back for a moment: here we are with 26 million people unemployed, underemployed or out of the work force altogether, millions of people facing the loss of their home, a huge cohort of baby boomers on the edge of retirement with nothing to support themselves but their Social Security and the topic that stands at the center of national debate is reducing the deficit. This is close to crazy.

What is even more incredible is how we got here. We have people who have literally been wrong about everything having to do with the economy over the last 5 years. They totally missed the $8 trillion housing bubble, the largest asset bubble in the history of the world. They were yelling about the budget deficit in 2006 and 2007 as the collapse of the housing bubble was about to explode the economy.

Then they underestimated the severity of the downturn, telling us the economy was going to bounce right back. And, then they got the interest rate story wrong. They told us that the large budget deficits caused by the downturn would lead the bond vigilantes to send interest rates through the roof. Instead they fell through the floor.

So who gets listened to in national debates, those who have been consistently right on all the key points, or those who have gotten things as wrong as you possibly can? Okay, we know the answer to that, but this knowledge is important. We are dealing with people who have no argument; they are relying on their control of public debate to get their way.

Fortunately, we are better situated to contest this now than we were 15 or 20 years ago because of the Internet. We have ways to reach a much larger audience and expose this nonsense than was true in 1990 or even 2000. We have to find creative ways to embarrass these folks.

I think the media is central to this story. There are a large number of reporters who like to believe that they are doing a good job. They can be shamed. When they get the facts wrong, we can expose it. When they rely exclusively on a narrow group of ‘experts’ all of whom want to cut Social Security and Medicare, we can expose that as well. This is the reason that I have my Beat the Press blog. I find that there are many reporters (not all) who will try to be reasonable if you can show a clear bias in their reporting. It shouldn’t be the case that getting everything wrong about the economy over the last decade is the main criterion for being taken seriously in policy debates.

Of course we have to push policies that are clear and simple and have real impact. This is one of the reasons that I am huge fan of a financial speculation tax. This is simple and makes so much sense to people. We impose a small tax that would be almost invisible to any person who uses the financial markets for their normal purposes (e.g. saving for retirement or borrowing for a business), but would totally nail those who buying and selling by the day or by the hour. And, it raises a ton of money to keep the deficit hawks happy.

Now that we actually have a bill that has been introduced in Congress and even scored by the Joint Tax Committee ($350 billion over 10 years), it will be great to see how long the budget hawk types can pretend that it doesn’t exist.

More generally we have to constantly look for points of entry where we can find politically feasible policies that make a difference and also make a point. The key policy fulcrums, areas like the Fed, dollar policy, and trade policy, are going to be out of reach for a while. But while we educate people about the importance of these policies we can try to push policies at the state and local level that can have an impact.

I am huge fan of work sharing, which can be done at the state level. Imagine that we had gone the route that Germany did. It had no better growth than the US but its unemployment is now half a percentage point lower than it was at the start of the downturn. States can go down this road, maybe not as far Germany, but certainly much further than they have so far.

We can also push at patent protection for prescription drugs. A lot of states have borders with Canada. Getting drugs there is a great thing to do. If state or local governments can do anything to institutionalize an importation process – pressing the limits of the law – then it can save money, provide people with needed drugs, and teach everyone that drugs are expensive because the government gives Pfizer and Merck patent monopolies.

In the same vein, we can try to promote trade in health care. There are top quality medical facilities in India, Singapore and elsewhere that can perform medical procedures at one fifth or one tenth the cost as in the United States. This can mean paying $20,000 for a procedure that might cost $200,000 here. If patients can take advantage of these facilities and share the savings with the government or private insurers than more and more people will come to recognize that health care in the United States is expensive because the government is protecting the incomes of highly paid medical specialists, hospitals, medical instrument manufacturers and drug companies. This is a great place where we can clearly use the market against the one percent.

It is always possible to find ways to make a point; to advance a progressive agenda. We have to be fast and we have to be opportunistic. But most of all we have to stop working from a script drafted by the right. The right can get mass public support for a pro-market agenda. They cannot get mass public support for an agenda that explicitly uses the government to redistribute income upward to the one percent. That has been the policy for the last three decades. Our job is to make sure that everyone knows it.

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41 comments

Intersting discussion that is generally quite on track in analysing what went on in the last 30-40 years, but ultimately pointless. Frankly, it is shear delusion to think that this can be turned around by any parlimentary means.

For a lot of reasons(mostly having to do with and the after effects of FDR’s resulting to World War), the 1% (to use today’s phraseology) were out manouvered the first time around (the previous Great Epression) and we ended up with a socialist revolution (as they see/saw it).

I see a big part of the problem being that while the financial sector understands money is a form of contract, they can still manipulate the system because the larger society is indoctrinated that it is a form of commodity. Since no one wants to live in a system where individuals are denied rights to personal property, the larger population is willing to accept large disparities in wealth in order to preserve these rights. The fact is that a piece of paper which says, “Redeemable for one once of gold,” is not a commodity, but a contract. The basis of a contractual system is not hard assets, but trust and when that trust is being squandered, the system falls apart. Eventually even the parasites will understand they need a healthy society on which to feed. Money is drawing rights to community productivity and some overall balance between supply and demand has to be maintained, not just a subverted system of asset allocation. We need precipitating benefits to match appreciating assets. If people understood money as a form of public contract, they would be more careful what value they draw from less tangible sources of value and society and the environment would be stores of wealth, not just resources to be squandered.

Siggy,
That’s not my point at all. We can base the currency on any number of things, precious metals, debt, tax base, commodities, etc. The question is with the mechanism of currency in the first place. A while ago, Yves ran a piece on how economists have spent much time considering indigenous cultures and how currencies first evolved in them but couldn’t find any truly aboriginal societies actually using them. That is because such groups are held together by an organic sense of mutual trust and reciprocity. When that breaks down, the effect is schism and conflict. It is only when societies get large enough and still have to function as units, that mechanisms of common currencies and systems of exchange begin to evolve.
So money is not so much notational value, as it is notational faith. Why would anyone really think gold is anything more than a pretty metal, if not for the faith that the larger society puts a value on it? We like to think of money as personal property, but its only useful value is how much others are willing to accept it.
If I may make a biological analogy, government is the society’s central nervous system, while the banking, financial system is its circulatory system, with money as the blood circulating within it. Now consider that this blood infuses every part of the body, yet circulates within the entire body. Similarly with the economic system, where money infuses every aspect of transaction and valuation, such that it is both foundational to ones property, yet a public utility connected to every other persons sense of security.
On top of that, its management and issuance are largely a private function of the banking industry, not a system of public trust, as are our various forms of democratic government. As such, it is similar to political feudalism, where everyone were subjects of the king.
So before even considering how we want to structure a system of common exchange, of which there are likely many variations, we first need to understand what it is we are trying to accomplish, which is a basis of faith in the economic system, that will be able to give some reasonable return on ones input. Rather than the current system of debt based currency, being gamed by those managing it, who extend and withdraw credit to their every advantage.

“That is because such groups are held together by an organic sense of mutual trust and reciprocity. When that breaks down, the effect is schism and conflict.”

On the weekend, TVO Big Ideas ran a pretty good speech by Alex Himmelfarb, onetime Clerk of the Canadian Privy Council, around those themes. It seems to be here (my system doesn’t have enough Flash to play it.)

Wrong, John Merryman, money is a commodity. The price of that commodity is interest on your “contract”. It doesn’t matter how its created, it cost money to buy it. When you say, “Money is drawing rights to community productivity…” you are trying to make abstract something that is not really abstract. Money is what I pay my banker to get the money to buy other commodities, usuallly cattle, maybe a new farm truck every 10 years – but that’s not so different from most small businesses – who buy money, to buy commodities – to make money.

Volker nearly put me out of business when my best rate to buy the money I needed to operate was costing 14%. It was right then, that I realized that Volker was running the price of one commodity up, to drive the price of other commodities down, mostly oil. Slick. That was my first experience with ‘structural adjustment’ which up til then I thought Jeffry Sachs and his ilk, the Western economy’s, IMF, were imposing on Russia and Eastern Europe’s emerging-from-communism countries. Volker was just like you and all the other obfuscators; behind his unjustified run up in interests rates was implicit denial that money is, first of all, a commodity, and secondly that the effect was to fight inflation, which was entirely because of one commodity’s, (oil’s) price spike. The financial sector had windfalls at the expense of every other business in the country. And the USA, heck, the whole world, structurallly adjusted to a whole new paradigm re: the price of energy. Forever higher.

Okie,
So banks manufacture that commodity by increasing lending, ie. demand. I’m not saying money can’t be treated as a commodity, but unlike cattle, or trucks, or feed, there are no limits on supply, only on demand.
Volcker didn’t cure inflation. Reagan and Stockman did. What is the difference between the Fed selling bonds it is holding, vs. the Treasury selling new ones? For one thing, the Treasury sells a whole lot more and pumps the money back into the economy in ways that tend to support more private sector investment and further increase the demand for capital. Basically they created a lot more debt to hold the excess capital sloshing around in the economy, but had to blame it on those wanting more for their products and services. By the Fed’s own logic of selling debt to reduce the money supply, surplus capital is in the hands of those with a surplus and are willing to loan it back to the government.
What happened with the oil shocks of the seventies was that the oil money came back to American banks and had to be absorbed, just as the Feds were dealing with higher oil prices by lowering interest rates. After that, they learned not to let excess capital seep into the real economy and just kept it juggling around in the financial system. Basically what derivatives and all the other multitudes of exotic financial instruments do, is to create a form of parimutual wagering that soaks up surplus liquidity. That’s why we have 1,000 trillion worth of financial instruments on a 55 trillion dollar world economy. It is now a very large tail wagging a skinny dog.
What drove the price of oil down was largely the other sources that came on line, due to higher prices.
Personal note, my father and grandfather were Gurnsey cattle auctioneers and after the price supports that were put in to preserve family farming, were removed in ’86 and collapsed the dairy industry, the family mostly went into what had been the side business of horseracing, which is mostly what I still do, though it is being run into the ground, in this state, Maryland, by very poor management.

First, I can’t for the life of me see why the “population” thinks that “large disparities in wealth” are needed to preserve property rights. European Nordic countries and Japan have a relatively high degree of equality at the same time as preserving property rights. Where’s the incompatibility between equality and property rights? There is no such incompatibility.

Second, there is no connection whatever between monetary arrangements and any tendency to despoil the environment. Several centuries ago the inhabitants of Easter Island ruined their environment in that they denuded the island of trees. I doubt they had a desperately sophisticated monetary system – or indeed any form of money at all.

Conversely, up to the beginnings of the industrial revolution in Britain, there was a form of money which I doubt “people understood as a form of public contract”. Yet there was little despoliation of the environment.

where to start. work share like germany? great if you can export to other currency controlled countries. Don’t forget to skip out before the bill arrives ( today). Once again wuth the raise taxes. It presupposes that everything govennment spends is for the goopd of the masses ( rather than the select few) .. its been said before absolute power corrupts absolutely.. where is the protection against the supposed protectors?

Start here: Who said everything the government spends is for the good of the masses? You made that up. In corrupt repressive kleptocracies -like the US – virtually nothing is spent for the good of the masses. Protection against the supposed protectors ultimately comes from civil society. Look at the transparency work TIRI is doing. They split off from from Transparency International because they wanted to sic the population on corruption. Good anticorruption work is as bottom-up as any anarchist libertarian’s dream. By contrast, top-down authoritarian parties like D and R exist to perpetuate corruption, not control it.

With respect to the TARP repayment and whether money was made, it seems like the question was about whether it was a good deal for the government, while the answer was about whether it was a good deal for the banks. Clearly, the banks were subsidized, e.g. got money for below market rates. But does that necessarily imply that the government could have gotten a higher return somewhere else?

Dean Baker is refreshing. But I disagree that the time for allowing massive bank failure is past. While the major klinker in the system is less MBS and more distressed sovereign debt, there remains a risk-management derivatives system that could easily implode and kill most major banks if the PIIGS default. I pray for such an event each and every day. Also, Baker might consider working with Michael Hudson and Greg Palast doing an expose on distressed sovereign debt vultures. These brilliant investors are edging the globe closer and closer to the abyss of war and they and the institutions that enable them need to be brought to heel.

I liked this interview better than the first one. I got lost in some twists and turns in the first one. Also today, I just happened to read Andrew Bacevich article on the military. His book/premise about perpetual war. American War is a corporation. It is practicing its own brand of free trade really – going wherever it chooses. The Navy now advertises itself as Navy to the World! Back in the wake of the Vietnam War there was a good book about the benefits of war. The scientific and tech advances, etc. The Cold War is credited with many tech advances we have enjoyed for the last 40 years. It is arguable that the money we spend on war is productive. But still in a perverse sense. If we could get rid of the murder and mayhem and just have a benevolent war corporation flying around in blue tights and a red cape as “Superpower!” saving the average citizen, that would be good. But we do not live in a comic book world. If our military wants to be the military to the world it needs to start feeding people; providing subsistence goods and services and protection from exploitation. If our military actually evolved into a force for good it would be worth the money we put into it. I would like to see them take up the cause of toxic cleanup too. I’m off the subject here but the military is a huge expense. Where are our dividends? Those revenues could bring us back to black.

that’s the funny thing with infrastructure and education. One person’s investment is another person’s waste, or in case of infrastructure — sprawl and mechanical oppression.

Folks here wants a highway and an airport; folks there wants their trees and their streams without silt. Folks here want shiny new schools and big bureacracies. Folks there know you need a book and a pencil and that’s it. But you need responsible adults too. and you can hardly buy those.

No way to end economic debates. They are all a big spiral infinite in both directions. And you just sort of wind your mind around them, up and down.

Why is it that progressive MSM economists such as Baker, Stiglitz,Galbraith and Krugman never mention a public banking option as endorsed by Michael Hudson, David Korten, Zarlenga and others? Pandora’ Box?

A Foppe not quite says, there is a big difference between trying to shift a bit the «conventional wisdom» and working outside it.

People like Baker, Stiglitz, Galbraith and Krugman still work within or at the margins of the conventional wisdom in order to be still acceptable to mass media.

People like Hudson, Black and others are nearly outside the window of acceptability for mass media.

BTW Baker with time has been pushing harder against the boundaries, and even deLong, who used to be almost entirely within the conventional wisdom, has been shifting a bit. Krugman has also admitted to shifting considerably and getting nearer to the boundary.

BTW one thing that Baker does not mention as to the incentives of professional Economists is that they can make significant money with consulting to corporations, to the point that their academic salaries can be a small percent of their incomes. This consulting may be just writing analysis, but it is often making speeches (a favourite way for corporates to reward their supporters) and also being expert witnesses. As to the latter the “law and economics” schools has made arguments about economic value, rather than justice or fairness, central to many valuable legal cases, and this has created a significant market for economists as experts in cases involving corporations.

All these can be very powerful reason why many Economists are very reluctant to say anything that might irritate potential customers.

“Black and others are nearly outside the window of acceptability for mass media”

At first I thought your idea that Black was outside MSM acceptability was ridiculous. But come to think of it maybe it’s not. That’s scary. Far from a radical, Black is actually a basic law-and-order kind of guy. It says something when it’s outside MSM acceptability to say that (certain types of) criminals should be prosecuted.

DB: The idea here is that if consumers are not spending enough to keep the economy near its full employment level of output, then we can simply have the Fed lower interest rates until it sparks enough consumption and investment that it brings the economy back to full employment.

Nice, but slightly academic.

The above does not happen uniformly or automatically. Because there is another attribute required. One called, the Feel Good Factor – an emotional state-of-mind that economists rarely think about. (Which is a great shame.)

It is a psychological emotion that, when positive, is conducive to the Propensity to Spend. Without a positive FGF, people, regardless of the interest rate will not pull out their credit-cards vigrously. They sulk and watch wearily what everybody else is doing. This very human condition is common but mild social mindset that a society must work its way through slowly.

We humans, unless marginalized, are deeply affected by the common sentiment of the communities within which we live.

We have had recently some of the lowest interest rates in history and yet Aggregate Demand is still weak – because a positive FGF is non-existent. As the saying goes, “When you loose your job, it’s a recession. When I lose my job, it must be a damn depression!”

Which I relate only to underscore the fact that economists think macro-economically but the consumer thinks micro-economically. That is, “What’s best for me?”

And if unemployment is too high, then people think, “There – in the unemployment rate – go I, but for the grace of God.” So they wait for signs of positive inflexion, which inevitably does come around. The only question is, When?

Fortunately, the FGF being a psychological emotion, it waxes and wanes depending upon human sentiment. But when the general sentiment is a bummer, as it is nowadays, then it takes a while to mend. In fact, for a recession as serious as was the Great Recession, it takes quite a while to get over. We tend to work our way out of a diminished Propensity to Spend in 3/4/5 years. (The Great Depression took a whole decade and WW2 to finally terminate.)

It is not I who is here rehashing the received wisdom of the past twenty years of supply-side consumerist economics; rather, it is you who is suggesting that it demand “waxes and wanes with human sentiment” rather than available income, and it is you who (through omission of all other factors at play) suggests that this “FGF” behaves in a cyclical manner independent of real economic developments.

At this point in time, focusing on the “importance” of consumer sentiment is like spending time on the question whether people should take an umbrella when they go out in the rain, when what is going on outside is a hurricane.

too much optimism here. As DB suggests, we have primarily a distribution problem. But the employment method, as in everybody works for a living, is failing – let’s remember, in every population, half the members are below average. we need a more direct model to get tickets to goods and services to the people that wants them. A new money system built on value of those goods and services will make an essential first step. But then, and more and more, we will need an alternate to employment foe people to qualify for the tickets.

This may have been a more enlightening interview if it was Dean Baker that was interviewing Philip Pilkington to get Philip’s ideas on policy rather than putting Philip in the position of scribe to Baker’s orthodox prescriptions.

When push came to shove most MMT advocates as well as many liberal/progressive commentators on Naked Capitalism supported an emergency bailout of our big banks in 2008 as well as a potential future emergency bailout of the big banks in Europe in 2011, through an expansion of powers of the ECB.

A primary, but largely ignored reason for such support may be because the liberal/progressive community tends to look at the economy from a managerial perspective. For example, many MMT advocates appear to be managers of the monetary system in waiting. In addition, this type of managerial perspective becomes much more pervasive in a culture where values are privatized or simply personal and subject to interminable debate, with the result being an assumption that the only way out of such a cultural moral breakdown is through a manipulation from the top of monetary/economic relations, simply in the interests of some type of temporary stability.

But the consequences of this degree of collusion and corruption between Big Capital, Big State and Big Bank, and the ensuing moral disorder which gradually began to emerge from the end of the 19th century, may still not have been squarely faced by the Progressive community. From my perspective, there no longer appears to be any chance of enlightened policy emanating from this present constellation of power.

In the first place there no longer appears to exist a moral framework which encourages public servants to do their duty for the good of the public. If a culture’s self-governing mechanism breaks down(a system of external constraint on behavior) it then tends to get more administration from the likes of Big State, Big Capital and Big Bank as a managerial response to the breakdown in values.

Is it conceivable that Occupy Wall Street could fall prey to the same dynamic? A seemingly strong yet decentralized administrative organization( built on a process of consensus decision-making at a local level) has been created, with the simultaneous glorification of a cacophony of political messages from a variety of moral viewpoints—seemingly fertile ground for management by experts in process rather than experts in money.

Sure, and the American revolution that St. Hannah Arendt so admired as the second coming of the Athenian polis (about which she was very starry eyed), was micromanaged by the Adamses.

That the MMT-ers are wannabe next-gen finance technocrats is why they don’t recognize we’re in a legacy system–the organized crime infested banking system and the neo-colonial militarism the monetary system enables, that is– not the Republic, which can eventually be restored.

“The problems we currently face are without doubt, as you say, purely demand-based. Certainly all the evidence I’ve seen – from both sides of the pond – leads to this conclusion too. ”

Neo-Keyenesian bullshit. How can you academics discuss the US as if it is like an other economy?
You cannot have these inane technical discussions, interesting as they are within a framework of lunacy, ignoring the greater context of the free lunch the US has been eating for at least over forty years through the reserve currency and most especially the petrodollar, both of which are right now a huge ponzi scheme. I guess “Ponzi Scheme “is considered rude at cocktail parties? Or below people like Krugman with (fake) Nobel prizes (it’s from a central bank in Sweden–what a joke!)

The reserve currency/petrodollar has been subsidizing the US way of life for forty years which I suppose is why no “credble” economists stresses how important it is.

Economics exists within the frame work of geopolitics. It is why all you economists get it wrong over, and over, and over, and over, and then wonder why you get no respect.

Bull! Having your curency used as the ‘world’s reserve currency” is as much a curse (maybe more) as a blessing. If we look at the Asian Mercantilist counries we can a see that they are willing to pay a very high price to aviod such a luxury. Recently, when some surplus countries turned towards the Japanese Yen to hold in reserve, Japan did not view this as a priviledge at all. It offset this inflow by increasing its own holdings of UST’s.

You obviously need a primer on the topic of the global balance of payments mechanism.

“The point here is that we know how to reflate an economy. Massive government spending will do it. It got us out of the Great Depression, although not until World War II created the political consensus for the level of spending that was necessary to actually do the job.”

This example is endlessly trotted out but the problem is that the circumstances now and those of the Depression culminating in WWII could not be more different.

Every facet of US industrial/economic production was put at the disposal of US war planners in an atmosphere of imminent “existential threat” which, though not valid in the case of North America, was nevertheless credible with the domestic population given that Europe and East/Southeast Asia were in flames and their peoples as well as captured Allied forces clearly at the mercy of brutal invaders. So:

1) The great bulk of the population, with robust propagandization, soon became essentially of 1 mind. Rationing, forced savings, anything deemed “necessary” for the war effort was embraced as heroic sacrifice – not being “patriotic” was socially unacceptable.

2) US planners were shaping the post-War world from the moment war was underway – actually, even before the war. The biggest government project of all time – but also simple to convey and though huge and complex, at bottom very straight-forward and SINGLE-minded.

3) The domestic unemployment situation simply evaporated. Price controls ensured what was in effect an unprecedented boom did not consume itself.

4) An enormous, oil-based, leading-edge technical/industrial infrastructure was built, one that was profitable, private and readily converted to building the America and world of the next 30 years but nevertheless was anchored by a permanently militarized core industrial/technology economy.

5) With the rest of the world prostate, the US could very quickly crank up consumer goods production and re-employ demobilized forces far, far faster than anyone else as the planners anticipated fully.

Now, tell me how these conditions are going to be replicated given current realities? Where is the consensus? Where is the sense of urgency? Where is the belief in shared sacrifice? And most important, where is the over-arching MOTIVATION, the PURPOSE, the GOAL that allows for concerted action on the scale of war for as long as a major war, but without the war? Oh, there has been the Cold War, the proxie wars, and now the “war on terror”, which conferred unheard of power on the National Security State, but these were mere blips in comparison – though an unbelievable waste of resources.

It’s not like there are not even greater threats to humanity than WWII’s horrors. There are. And they are soon upon us. But the only real solutions require very close cooperation with other nations, not war, and certainly not the financial war currently underway – cooperation of the sort the US and some of those nations are even less interested in than they are acknowledging the threats themselves.

Again, the circumstances of today vs 70-80 years ago could not be more different. It is incumbent on those claiming rough equivalence to present some sort of argument to the contrary in order to claim THIS debt/credit collapse can be resolved as readily as the last one via open-ended deficit spending in a fully globalized economic and geopolitical reality of 2011. You could throw 5 stimulus packages of the same sort as was deployed by the Admin at the current problem and achieve precisely nothing because there was and is no intention of real change, nor any recognized national goal of any sort around which the people can be rallied in evidence in the national discussion even as we head inexorably over the unsustainability falls.

It’s just a replacement of spending power. Prior to the crash people were spending borrowed cash and the economy was running at high levels of employment. Replace the borrowed cash with government cash and the same thing happens.

It’s pretty simple. That’s why its so beautiful. So few assumptions. All we do is replace the cash.

I think the most egregiously wrong thing you say is, “There are a large number of reporters who like to believe that they are doing a good job. They can be shamed.” I don’t believe that’s true at all. There may be a few such exotic creatures still in the world, but most of them (I believe) don’t care because they make more money (or just keep their miserable jobs) by writing the lying slop they do. WaPo and NUT (Pravda on the Potomac and Izvestia on the Hudson) are committed to a right-wing world view and either distort or ignore any story that doesn’t conform to their Galtian masters’ goals.

My very quick read of the interview is DB is wrong to ignore the economics of looting (per Akerlof and Romer. both Galbraith, and William Black). Specifically his assessment of the 90s as a stock bubble is incorrect. It was the start of full scale looting, the kind of looting which directly leads to local job loss and the lowering of most wages. We need a correct assessment of why we are are in our current economic troubles to escape them. The forces that put us here are man-made (all political and economic actions are) and so need men to change them – we can not “wait for the storm to blow over”. Until the economics of looting are addressed, the economy will not”recover” – if by that you mean the 99% will have hope for their future. Check out what happened to Iceland where the people who crashed that system did not lose their power, did not lose their money, and did not go to jail, so they remain in place to subvert any change.